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Long-Term Credit Bank of Japan, Ltd.

Long-Term Credit Bank of Japan, Ltd.

2-4, Otemachi 1-chome
Chiyoda-ku
Tokyo 100
Japan
(03) 211-5111

Public Company
Incorporated: 1952
Employees: 3,500
Assets: ¥24.85 trillion (US$16.59 billion)
Stock Index: Tokyo Osaka

The Long-Term Credit Bank of Japan (LTCB) is one of only three Japanese banks licensed to issue long-term loans to industry. These banks are unique to Japan. They were created expressly to accelerate postwar industrialization by directing investment funds into basic industries, free of competition from the large commercial city banks.

The long-term banks (LTCB, Nippon Credit Bank, and Industrial Bank of Japan) have no private customers; their only clients are corporations. But although they are operationally removed from the public, they have affected the lives of all Japanese citizens by financing construction of the factories where they work, underwriting the development of new products, and in many ways making Japans economic miracle possible.

The LTCB was founded in 1952quite late in the history of Japanese finance. The Japanese government, through the Ministry of Finance, created two (and later a third) such special banks as a provision of the Long-Term Credit Banking Law of 1952. The LTCB was formed from departments of two established state banks, the Kangyo Bank and the Hokkaido Colonial Bank. Initially, half of the LTCBs capital was subscribed for by the government. But as the Japanese economy grew in strength, the government slowly relinquished its ownership to corporations and private investors.

The LTCB and the Industrial Bank of Japan were given exclusive rights to sell three- and five-year debentures; in return, they were not allowed to accept short-term deposits. As a result:, the central bank became the LTCBs primary source of capital; the LTCB channeled investment funding from the government directly to expanding basic industries. Companies often secured their loans with large blocks of shares, which brought LTCB representatives onto the boards of major corporations. As these industries matured, they repurchased their shares with cash, increasing the banks capital base.

Strictly speaking, the long-term credit banks were not capitalist institutions. They performed part of the central banks function by managing the allocation of funds for industry. Because they were profit-oriented and publicly owned, and there were only two to serve many competitive industries, the long-term credit banks were required to maintain strict neutrality; favoritism toward any of the emerging industrial groups would have invited government intervention. By 1957, however, the LTCB and the IBJ were unable to handle the tremendous volume of business generated by the rapid expansion of the Japanese economy. That year, in an effort to ease the situation and create more competition in long-term credit, the Japanese government chartered a third competitor, the Nippon Credit Bank.

The Japanese economys broad-based growth brought continued expansion to the LTCB. As one of the few institutions in Japan awash in cash, the LTCB became a popular source of investment capital for companies involved in such basic industries as electricity, shipping, and steel production. LTCBs influence grew as it continued to gain seats on the boards of such companies. And since most of the companies were investment interests as well, the bank also profited directly from their subsequent growth.

During the late 1960s, the LTCB began to emphasize new industrial ventures, primarily in shipbuilding, electronics, automobiles, and petrochemicals. The bank also pioneered long-term financing of land reclamation and housing projects, and participated in a reorganization of Japans commodity distribution system.

As a semi-official institution, the LTCB was required to maintain lower-risk activities, and indeed, it experienced no mishaps. Its growth closely reflected general trends in the Japanese economy. The bank was largely unaffected by a stock market crash in 1964, although it suffered some setbacks during the oil crisis of 1973-1974 as industries were forced to adjust to entirely new cost structures.

The second oil price rise in 1978-1979, however, meant slower investment and lower demand for loans. During this period, companies found that in many cases they could do without long-term banks and raise funds more cheaply by issuing bonds. An entire lending sector was thus handed over to Japans growing securities firms. The LTCB tried to pursue this business into new markets, but was prevented by Japanese financial regulations.

In the late 1970s intensive lobbying efforts from the financial sector began to pressure the government to repeal Article 65, the provision that keeps banks and brokerages from entering each others markets. Traditionally conservative and staid, the LTCB recognized that it would have to change in order to remain competitive.

Like the city banks, the LTCB began to develop an ambitious international consulting capability. In one sweep, the heads of LTCB subsidiaries in England, Belgium, Switzerland, and Hong Kong were replaced in 1985 with new personnel acting under central direction. LTCB also created a global network for its Merchant Banking Group, formed in 1985, by coordinating its offices in Tokyo, London, New York, Hong Kong, Singapore and Los Angeles.

Another change in the banks strategy was a realignment of its lending activities away from Japanese heavy industries toward service industries and foreign companies. The LTCB claims to have begun this effort as early as 1965, years before its larger competitor, the IBJ. The bank has, indeed, succeeded in reducing its share of domestic assets to lending in the manufacturing sector from 60% to about 15%, while the IBJ remains at about 24%. Still, the LTCB was forced to write off ¥70 billion in 1985 when Sanko Steamship, a major client, failed.

It has been noted that the LTCB is less likely than the IBJ to participate in the unprofitable restructuring of a client. While this inclination has been good for its books, some companies are less likely to do business with the LTCB knowing that the bank may not be there for them in time of dire need, which may be one reason why the IBJ remains larger than the LTCB.

The LTCB also set its sights on the stable and profitable business of dealing in American treasury bonds and Eurobonds, since it wasnt under the jurisdiction of restrictive Japanese legislation in these foreign markets. In 1987, the LTCB tried to buy Greenwich Capital Markets, a U.S. Treasury bond dealer, but was prevented by the Federal Reserve on the grounds that American banks were being denied similar access in Japan. The LTCB had to be content with a passive minority share of Greenwich until the Fed reversed its decision in June of 1988, allowing the LTCB to acquire full control of Greenwich for $144 million.

The bank met with similar hardship in London, where the Ministry of Finance bans Japanese institutions from lead-managing Eurobond issues. In spite of this handicap, the LTCB has been successful in the Eurobond market. Should financial regulations in England be relaxed, the LTCB could very well become one of Londons leading international securities firms.

The LTCBs effort to become an international wholesale bank headquartered in Tokyo demonstrates the banks resolve to seize the initiative as world financial markets open up. While many have feared that Japans four major brokerages stand the most to gain from such a liberalization, the LTCB appears determined to capitalize as well.

Principal Subsidiaries:

LTCB Asia Limited (Hong Kong); The Long-Term Credit Bank of Japan Finance N.V. (Curacao); LTCB International Limited (U.K.); LTCB (Schweiz) AG (Switzerland); Greenwich Capital Markets, Inc.; LTCB Australia Ltd.; LTCB Merchant Bank (Singapore) Ltd.; LTCB Futures (Singapore) Pte. Ltd.; LTCB Trust Co. (U.S.A.); The Long-Term Credit Bank of Japan (Europe) S.A.

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